On May 23, the Department of Health and Human Services published its regulations for implementing Obamacare’s health-insurance-rate reviews, effective September 1.

They are another instance, as Kevin Williamson notes, of the kind of arbitrary and politically manipulated regulations that inevitably result when Congress enacts vague, subjective, and aspirational legislation rather than clear, objective, and specific statutes.

Fortunately, this bad idea is one of many in Obamacare that can be defunded.

These rate-review provisions were an entirely political exercise from the start. They were only added to Obamacare in the fall of 2009 — after the health-insurance industry had the temerity to point out that other provisions of the legislation would drive up premiums — in order to give HHS authority to review so-called “unreasonable” premium increases (but not the authority to block those increases, nor a definition of “unreasonable”). Blame for Obamacare’s inevitable cost increases could thereby be deflected onto insurers.

In addition to being transparently political, these provisions have negative practical implications. For example, the proposed rule setting an arbitrary 10 percent price-increase threshold could cause insurers to target rate increases to just below the limit.

Indeed, it is a well-documented effect of price controls that sellers respond to the imposition of price “ceilings” by turning them into price “floors.” The less competitive the market on which price controls are imposed, the sooner that phenomenon occurs.

Under these regulations, any rate increase of 9.9 percent or less will not trigger a burdensome, publicized federal rate review, so why should an insurer limit a rate increase to, say, 6 or 7 percent? Theoretically, competitive pricing pressure might discourage such behavior. But these and other Obamacare insurance regulations will reduce competition by driving smaller carriers out of the market, and after 2014 the remaining insurers will be selling to customers who are required to buy their products. Thus, the perfectly rational response will be for the remaining insurers to have 9.9 percent annual premium increases ad infinitum.

An even bigger problem with these regulations is that they are contrary to the legitimate purpose of insurance-rate supervision — which is to make sure that carriers charge high enough premiums to cover their claims costs. In a competitive insurance market, regulators don’t need to worry much about possible “price-gouging,” since competition checks such behavior. However, regulators do need to be concerned about insurers trying to attract more business by under-pricing coverage while complacently underestimating their future losses — the actuarial equivalent of “rosy scenarios.” The danger is that if premium income isn’t sufficient to cover claims costs, an insurer risks becoming insolvent. That harms everyone, including policyholders or taxpayers who can be left liable for claims the insurer can’t pay. Indeed, as I noted last year, it was exactly such behavior that produced the collapse of AIG and its resulting taxpayer bailout.

Thus, any rate-regulation regime that focuses only on holding down rates while ignoring insurer solvency is inherently dangerous.

HHS admits that this is a serious flaw in the statute: “We acknowledge that inadequate rate increases can be problematic.” But HHS blithely dismisses those concerns, stating that since the statute “does not identify adequacy among the criteria to be considered when determining unreasonableness,” the Department isn’t going to consider it either. HHS then insouciantly notes that “many States do explicitly consider the adequacy of rates during their reviews, and nothing in this regulation prevents or prohibits a State from continuing to consider this factor in their review in the future.”

This is where Congressional defunding comes into play. Included in Obamacare’s $105 billion of advanced appropriations was $250 million for HHS to distribute in grants to state insurance regulators to implement stricter rate regulation. The purpose of those grants is to bribe state insurance departments into enforcing Obamacare’s new federal price controls.

Last summer, HHS distributed $46 million of that $250 million to 45 states and the District of Columbia ($1 million to each) in the first round of rate-review grants. HHS intends to award a second round of grants in the fall. Congressional appropriators need to intervene and rescind at least the remaining $204 million earmarked for rate-review grants.

Meanwhile, the five states that did not apply for the first round of grants (Alaska, Georgia, Iowa, Minnesota, and Wyoming) should continue to refrain from doing so, while states that received the initial funding should follow the lead of Oklahoma’s Insurance Department and return the money. Doing so is in the interests of state lawmakers, who should want to preserve the independence and integrity of their state insurance departments in light of the inherent conflicts that will arise between the new federal rate regulations and existing state insurer-solvency laws.

— Edmund F. Haislmaier is a senior research fellow in the Heritage Foundation’s Center for Health Policy Studies.